How do amateurs use the stock exchange

The 10 Biggest Investor Mistakes ... And How To Avoid Them

GEWINN asked around experts to find out which mistakes are typical of investors, why they are so crucial for the wallet and how they can best be avoided.

Photo: photoschmidt - GettyImages.com

“Self-knowledge is the first step towards improvement!” Is a well-known saying. This is especially true when it comes to investing. Because nobody is immune from costly mistakes in this area - from beginners to committed amateurs to professionals. They all fall into investor traps again and again, in which a lot of money is "burned". From the speculative bubble with tulip bulbs in Holland in the 18th century to the hype about Internet stocks in the 1990s or sticking to a pure savings account investment at zero interest - the list of irrational investor behaviors is long and varied.

GEWINN therefore asked around experts to find out which mistakes are typical of investors, why they are so crucial for the wallet and how they can best be avoided. The good news is that you don't have to be a Nobel Prize winner to understand the mistakes and avoid them in the future. The bad news: But you need a lot of discipline and patience - the parade virtues of successful investors like Warren Buffett or André Kostolany.

"To err is human". . .

. . . is another saying that often applies to financial decisions. Most investor mistakes can be traced back to human weaknesses. Because the purely rational person or “homo oeconomicus” may be helpful for creating simplified, scientific models.
In reality, all too human traits such as greed, impatience, overconfidence etc. play a decisive role in the financial markets, which is why behavioral finance has developed its own scientific discipline that examines precisely these phenomena.

GEWINN subscribers are familiar with the much noticed column on investor errors by WU professor Manfred Frühwirth in GEWINN.

Mr and Mrs Austrians have currently bunkered around 260 billion euros in savings of all kinds. This means that every inhabitant of our country - from babies to grandmothers - has an average "nest egg" of around 29,300 euros. "How much security do you really need?", Asked Helmut Siegler, board member and chief investor of Schoellerbank, in view of these considerable reserves: "The Austrians do not deal critically enough with the question of how much money they actually need for repairs and emergencies. and are ready to accept a real loss for it. "

Too high a share of savings

Investors in other countries act much more skillfully here, as an international comparison shows. Siegler points out that, as a private investor in this country, there is no need to fear negative interest rates on savings deposits, but that inflation is still "gnawing" at the purchasing power of the savings: "With average inflation between 1.5 and 1 .9 percent is 9,000 euros in just six years. This corresponds to a loss of purchasing power of around 1,000 euros. And this low interest rate is not a temporary phenomenon, but will be with us for a long time to come. "

CONCLUSION: In any case, you should invest some of your money (not all of it!) In stocks over the long term - ideally broadly diversified via corresponding investment funds or listed index funds (ETF). Alternatively, you can entrust the management of a bank or a robo-advisor.

A rule of thumb is that you should keep three to six months' salary as a reserve in your savings account. Anything beyond that that is not saved specifically for planned larger purchases can and should be invested in the long term. Also at the risk of a stock market crash tomorrow, causing stock prices to collapse and book losses. Because if you act long-term and do not sell at the first headwind, you have little to fear (see mistake no. 2).

“Stocks are so risky. It's only for professionals, ”are common prejudices. Erich Stadlberger, Head of Private Banking & Asset Management at Oberbank, does not speak of shares right from the start when giving lectures or discussions with customers: “I prefer to talk about an investment in a company. Because everyone wants a piece from a successful company. Shares are only a means to an end. "

In the long term, you could make about as much with stocks as companies could expand their profits. "With stocks before costs and taxes, around six percent average annual income is a valid figure in the long term," the banker calculates.

No loss from 14 years

With a certain stamina, you can hardly go wrong when investing in stocks, as the graphic shows. In contrast, investing in stocks in the short term is pure speculation. A one-year investment in the world share index MSCI World, which tracks the development of around 1,600 largest listed companies from industrialized countries worldwide, would have yielded between -43.5 and +66.1 percent since 1972, according to calculations by the platform “Dividenden-Adel” (including net Dividends). After that, the risk of a loss gradually decreases, and from the age of five the risk-reward ratio of an equity investment becomes really convincing.

With a holding period of 14 years or more, there has not been a single period since 1972 in which you would have made a loss with a global equity investment - regardless of when you got in, and that despite two oil crises, three Gulf wars, the great stock market crash in 1987 , the bursting of the internet bubble and the great financial and economic crisis of 2007.

Perseverance paid off

For all those who have shown staying power on the stock market, it has always paid off: With a 20-year investment in the global share index, the worst-case scenario would have yielded an increase of 2.3 percent per year - if you had bought in March 1989 and sold at the bottom of the financial crisis in 2009.

Of course, there is no guarantee that the returns on stocks will continue to be as high as they have been in the past 50 or 100 years. In the case of individual securities or markets, one should be very careful with the extrapolation of price trends into the future (see error 3). However, the assumption that stocks will, in the long term and on average, bring a positive return in line with the development of corporate earnings is considered secure.

"Timing extremely difficult"

Investors for whom the long-term realistic returns of five or six percent per year are not enough, often try to increase the return by buying at low prices and selling at high prices. According to Stadlberger, this can work out well in the short term, but “the right timing is extremely difficult over very long periods of time. Just a few days can decide about a long-term profit or loss ".

According to studies, for example, the return on an investment in the European MSCI Europe share index would have halved between 2003 and 2017 if only the ten best trading days were missed.
Conclusion: Investors shouldn't see stocks as short-term speculation, but rather as a long-term investment in order to achieve high returns with a little patience and perseverance.

It's a trap that even investment professionals often fall into: A security shows a price development with a clear upward trend, such as the share of the German payment service provider Wirecard: From the beginning of January 2017 to the beginning of September 2018, the share price quintupled in a spectacular way , almost uninterrupted upward movement. Many investors wanted to jump on the bandwagon. But the hope that the development of the Wirecard share could be extrapolated into the future solely on the basis of the previous price trend was disappointed. The share lost a lot due to allegations of balance sheet manipulation and is now well below its highs.

Experts call this behavior an "extrapolation error", which can also happen with the opposite sign when investors mentally extrapolate a downward trend on the stock markets into infinity and therefore hesitate far too long before (re) entering the market.

Markus Kaller, investment expert at Erste Group Bank, cites another current example: “In the last ten or 15 years, bonds have seen a price rally due to falling interest rates. However, one cannot assume that this earnings trend will continue because interest rates cannot fall so sharply forever. "

Be Conclusion: “Investors should pay less attention to the previous price development and rather start considering whether their investment still has imagination from a fundamental point of view in the future. From this perspective, it is also easier to cope with intermittent setbacks. "

In principle, the herd instinct is a deeply meaningful human behavior that is deep in our subconscious and can save lives in emergency situations: For example, in the event of a fire or an explosion, there is often not enough time to weigh up the options for action, but you have to think about it trust that the herd simply knows more than you do at the moment.

“On the other hand, it can be very disadvantageous when investing if you are the last to jump on a current trend,” explains Uli Krämer, authorized signatory and head of portfolio management at Kepler Funds. Because in the financial markets, mass phenomena are often based on irrational behavior, as evidenced by the development on the Neuer Markt of the Frankfurt Stock Exchange at the turn of the millennium: “The share prices have continued to rise due to the hype surrounding the Internet, although one can only judge from the absurdly high ratings the company should have already recognized that this cannot be a healthy development, ”remembers Krämer. Similar bubbles have often been formed in history, most recently in 2017, when many investors bought Bitcoins and other crypto tokens only on the basis of the information that the prices had risen so far.

“We are currently not seeing any herd behavior in the stock market. The mood is neither too optimistic nor too pessimistic. In view of the long bull market, investments in stocks are also below average, ”says Krämer, who has been relying on the results of Professor Teodoro D. Cocca, specialist in behavioral finance at the Johannes Kepler University Linz, with the Kepler Fund for ten years cooperates.

Conclusion: Private investors can avoid financially dangerous herd behavior through disciplined, regular investing using a savings plan and a fundamental skepticism about hypes and negative hysteria.

Admitting this mistake is particularly difficult for most people, especially when it comes to investing. Many private investors and professionals alike have the feeling that they have “everything under control” when it comes to their investments, and largely ignore the associated risks. “Overconfidence is expressed, for example, in a significantly increased frequency of purchases and sales, because you constantly have the feeling that you have to take action and take advantage of any opportunities that seem to be opening up,” says Monika Rosen, chief analyst at Bank Austria.

In many cases, investors believe that they can forego broad risk diversification and only “bet” on a select few or even one single horse. In doing so, they feel briefly confirmed by individual lucky hits and unconsciously ignore failures. Overconfidence also leads many to believe that you can always pinpoint the perfect time to get in and out. “This phenomenon tends to be more widespread among men than among women,” says Rosen.

Modest results

The negative consequences of overconfidence in the financial markets are noticeably reflected in earnings: For example, a study by the Warwick Business School has shown that men buy or sell securities 45 percent more often, but an average of 2.65 percent less earnings than women could generate. "The increased trading activity alone leads to higher expenses and thus to a disadvantage in terms of performance," explains Rosen.

Conclusion: Investors can avoid the pitfalls of overconfidence by placing the majority of their investments on a broadly diversified portfolio of funds and ETFs and limiting risky “bets” with individual stocks to a very small part of their assets.

For many people, investing outside of the savings account is still relatively uncharted territory. It is therefore hardly surprising that you initially concentrate on investments that are particularly close to you in terms of location or content. Many experienced stock exchange traders also rely mostly on companies from their environment because they believe that they can take advantage of a certain information advantage over international investors.

In “behavioral finance” this phenomenon is known as “home bias”. “The home bias is still extremely pronounced among investors. Various studies have come to the conclusion that 60 to 70 percent of investments are made in their own country or currency area, ”says Philipp Brugger, Head of Investment Strategy at Union Investment. According to a study from 2003, Austrian investors also invest around 39 percent in domestic stocks - with a share of only 0.17 percent in the world stock market.

What is so bad about investing in your home country? “With the strong focus on the home market, one misses the chance of higher yields with lower fluctuations at the same time, which can be achieved with a broad international diversification,” says Brugger. Above all, he believes that it is a mistake not to (sufficiently) consider the USA in the assessment: "In the USA, the profitability of companies is higher in the long term than in Europe, and the workforce is growing there while it is shrinking in our country." According to Brugger, diversification across different currencies (especially US dollars) would have a long-term positive effect on income and risk in equity investments.

Conclusion: The same applies to home bias: Risk diversification is the top priority in investing. With an internationally diversified investment, you can achieve higher returns in the long term with lower fluctuations than with a predominantly home depot.

Typically, when investing in stocks, investors concentrate almost exclusively on the price development, which is considered the "holy grail" of investments and is intended to ensure the expected returns - and neglect a more reliable source of income: dividends, i.e. that part of the profits that companies give to shareholders is distributed.

“An investment in the world share index MSCI World would have brought an average annual return of 6.0 percent since 2001. 2.6 percentage points can be attributed to dividends alone, ”calculates Alois Steinböck, chief investor at Amundi Austria. According to Steinböck, a similar effect can be observed in all stock markets around the world: "With the US stock index S&P 500, for example, the dividend share of earnings is 30 percent, with the domestic ATX 33 percent." for most of the other often quoted indices already contains dividends, the distributions to the shareholders have a particularly positive effect on earnings.

Steinböck mentions another important argument not to ignore dividends in the investment: "The regular distributions cushion the exchange rate fluctuations and play a major role especially in the persistent phase of low interest rates." However, he advises against focusing exclusively on those companies that currently offer the highest dividend payments: "You have to ask yourself the question of whether the company generates the distributions from current profits or simply pays out from the assets."

Conclusion: Investors should not concentrate exclusively on the price development, but should also consider the dividend payments as a stabilizing regular earnings factor. The same applies here: Do not invest everything in a few “dividend emperors”, but spread them widely!

Even at school you learn what a strong long-term effect compound interest has on savings - at least at a time when there was still interest on the savings account. “Investment costs are something like a negative compound interest effect.Here, too, supposedly small differences have an incredibly strong effect in the long term on the final value, ”compares Gerd Kommer, financial advisor and bestselling author. An example illustrates the effect (see graphic): Even a difference of only one percentage point in the running costs brings a benefit of almost 10,000 euros over a period of 30 years.
“The second reason why you should be particularly careful with costs is that, as an investor, unlike the other factors, you have the costs in your own hands. Apart from that, you are at the mercy of the market, but you can and should control costs. "

Specifically, according to Kommer, you can save if you keep your securities account with online brokers, which are usually cheaper than branch banks. “And if you want to invest globally on a broad basis, it doesn't get any cheaper than with listed index funds, or ETFs for short. You can get a global equity ETF at running costs of 0.1 percent per year, an active fund usually costs fifteen times as much. "

Conclusion: Investors should not underestimate the cost factor in investing because there is great potential for income behind supposedly small differences.

No single asset class, be it stocks, bonds, savings or alternative investments, can be relied on year after year. In a year stocks make big gains, while gold makes big losses. It may be the other way around next year.

The good thing about it: You can take advantage of this effect to stabilize the portfolio. Ernst Huber, head of Dadat Bank, emphasizes: “Investors shouldn't invest everything in stocks, but rather spread them widely across several asset classes. This dampens or even compensates for slumps in individual asset classes. "

If you have invested around 30 percent in stocks, a sharp drop in the stock markets of 20 percent will only result in a minus of six percent in the overall portfolio.

Conclusion: A broad diversification across several asset classes reduces the risk and fluctuations enormously. Private investors can use mixed funds or multi-asset funds, for example, or entrust the money to an asset management company that automatically mixes several asset classes. Experienced investors can build a diversified portfolio themselves using funds and ETFs.

When the stock markets go down again, as last at the end of 2018, many investors feel tempted to rush to throw their investment strategy overboard. Often they then turn their backs on the stock markets completely for fear of further losses and sell their shares in bulk.
This behavior is a typical mistake, because only then can you earn the high returns in the equity sector
if you invest long-term and stick to your investment strategy. Because most miss out
Fear of further setbacks and the ensuing recovery of the overall markets.

The situation is completely different with tactical decisions with regard to individual securities: Here the motto is: "Better an end with horror than a horror without end."

Realize profits too early

“When the price of a stock has fallen after buying it and a financial loss has occurred, investors tend to wait too long to sell. Conversely, they tend to sell the profitable share too early after the price has risen above the entry price, ”says Professor Manfred Frühwirth from the Vienna University of Economics and Business. The reason for this: Investors look forward to the first 1,000 euros gain more than the second 1,000 euros. It is a mirror image of losses: Here the first 1,000 euros hurt more than the second 1,000 euros loss - under the motto: "It doesn't matter anyway."

Disposition effect

The behavioral finance expert explains why it is so difficult for most investors to part with “corpses in custody accounts” or not to sell winning shares prematurely: “This phenomenon is called the disposition effect and can be attributed to loss aversion. Before making any decision, for example to buy or sell shares, we set a reference point to which we can relate possible gains or losses. In the case of sales decisions after an equity investment, this can be the entry price, for example. If the current price is above the entry price, we are in the profit zone and therefore risk averse. That is why we tend to sell the stock too early to reduce our risk. "

The opposite is true, according to Frühwirth, if you are in the loss range compared to the entry price: "Then investors are willing to take risks and therefore tend to keep the share for too long - in the hope that it will rise again."

This asymmetry between the fear of losses and the joy of making profits is illustrated by fictitious examples in the graphic: An investor who bought Airbus shares at 85 euros realizes the profit prematurely at 95 euros because he thinks about the small profit overly pleased. In return, however, he holds on to Deutsche Bank shares for far too long because additional losses from a certain point "hurt" him less than the initial loss.

Conclusion: While you shouldn't change your investment strategy every time you set back on the stock markets, it makes sense to say goodbye to individual "depot corpses" quickly and invest in more promising stocks that tend to make up for losses more quickly. On the other hand, you shouldn't sell profitable stocks too quickly, but let them run if possible. In this context, it is practical to use a so-called “trailing stop loss order” that rises with the share price, but automatically sells the security in the event of major setbacks.

In any case, it would be wrong to compare the current price versus the entry price at the time; the comparison of the current price versus the current fundamental value of the share is more productive.